Careful pre-planning can help you stay on track — and on budget

Craig Essery and his wife Kathy had big plans for the right house. They just had to find it first.

One week before Christmas, they walked into a small bungalow in Toronto's west end. Nothing had been touched since the home was first built in 1950. It was perfect.

“We didn't want a place that had been renovated,” says Essery, a home renovations contractor in Toronto. “It had the original kitchen. There was an old mirror above the mantel and, behind it had never been painted.”

“We just knew there was so much potential,” says Kathy. “Even though it was an old house, the bare bones were amazing.”

They — along with 22 other people — placed an offer on the home.

“The day after they accepted our offer, we came in to draw a renovation plan for downstairs and upstairs. We did a walk-through and a measure. I brought the electrician because I knew it was all knob and tube,” says Craig.

They had only two weeks to plan a renovation and another three to complete it. On the to-do list? Replace the kitchen. Create an open concept live. Build a mud room. Turn the upstairs bathroom into a powder room. Finish the basement. Don't break the bank.

“We closed on Jan. 6 and the demolition was done on Jan. 7. Someone was here every, single day. It was constant work,” says Kathy.

Craig used a colour-coded calendar to outline what work was scheduled for which day. “I posted the calendar on the wall too, so the trades knew exactly when they were due back,” he says.

They stuck to the schedule and finished the reno on time. But, with the addition of a new bathroom, “we blew our budget out of the water,” says Kathy.

The Canadian Home Builders Association says the key to a successful renovation lies in the time and energy you spend prepping for it. They recommend homeowners do their homework before approaching a contractor, designer or architect.

That means knowing exactly why you are renovating. Evaluate the structure, systems and general condition of your house.

The more information you can provide, the better advice and more accurate cost estimates you will receive.

Renovations aren't for the faint of heart. You have limited access to your own amenities, a slew of workers running through your home and clouds of dust hovering in your living space. What's more, high expectations and ballooning budgets can fuel even higher emotion.

About 55 per cent of Canadian homeowners anticipate big-ticket home improvements within the next five years, says the Canadian Mortgage and Housing Corporation (CMHC), in its 2013 Mortgage Consumer Survey.

According to the survey, one-third of potential renovators would like to make structural repairs, such as a roof or foundation, while 65 per cent hope to improve their living spaces, such as a bathroom or a kitchen. About 38 per cent expect to spend more than $10,000. Of those, 32 per cent will to use some form of loan or financing.

Katharine Trim, spokesperson for the Financial Consumer Agency of Canada (FCAC), says homeowners should assess all their options before borrowing.

“Review all of the costs and the reasons. Look at some alternatives. Can you save up the amount you need? Does it have to be now or can you wait? One of the dangers is you may feel like you have cash, but you actually don't,” she says. “If you draw on the funds, you will be incurring a debt.”

Whether you plan to borrow or use your own money to fund a renovation, you may want to speak to a financial adviser. Is the debt worth the renovation? Can you realistically afford the extra payments? Will I be approved for a loan? A financial adviser can help you weigh those options.

For those who intend to borrow, there are different options to suit different needs.

If you want to make upgrades to an existing home, you may want to consider using the equity in your home. You have four basic options: You can refinance; borrow from the amount you've prepaid on your mortgage; use a home equity line of credit or take on a second mortgage.

The FCAC says the benefit of using one of these options, rather than a personal loan or a credit card, is that interest rates on loans secured with home equity can be much lower.

If you want to purchase a home and expect a renovation will be needed, you may want to consider the CMHC's improvement program (also known as the purchase plus improvement program), a mortgage loan that covers the home's sale price, plus the cost of a renovation that would increase the property's value.

“If you're buying a fixer-upper, bring your contractor with you and have him prepare an estimate for the needed work,” advises Mark Salerno, Ontario manager of communications and marketing for CMHC.

“Then, when you've got a purchase-of-sale agreement, you'll also have this extra amount.

“The lender will look at that and ultimately decide how much it wants to lend. Then you've got the money in hand and you're not scrambling to find money for a reno after the fact,” he says.

Homeowners are encouraged to seek grants and rebates to help them pay for the renovations. There are many different kinds available from federal and provincial governments.

Craig and Kathy Essery — along with 68 per cent of Canadians — used their own funds to pay for their reno. They set aside about 20 per cent of their budget for unforeseen costs.

“The most important thing in a renovation is the pre-planning,” says Kathy. “Do you have enough money in you budget for a contingency plan? Because, without fail, you're going to go over budget.”

“You can open up a floor or a wall, and only then you see something's been compromised,” says Craig. “On the spot, you have to decide, while you have the roof open or while the floors are up, do you want to do the additional work? If you do, that can add up to thousands of dollars.”

Kathy says she underestimated the cleanup, too. “We sat here in a cloud of dust after I had just finished dusting. Get the ducts cleaned before you and your furniture move back in. These are the expenses you don't think about and are the tiny things that chip away at your budget,” says Kathy.

“I've been around renovations for a long time,” she says. “But even I get surprised.”

Compare your options

If you're not paying with cash, here's what the Financial Consumer Agency of Canada (FCAC) wants you to know about borrowing on equity.

Refinancing This option may involve changing the terms of your original mortgage agreement. You can borrow up to 80 per cent of the appraised value of your home, minus the amount left to pay on your first mortgage.

Borrowing from prepayments Certain lenders may allow you borrow any amount you have prepaid on your mortgage. These funds will be added to the balance of your mortgage principal. The interest rate may be different from the rest of your mortgage for the remaining term.

Using a HELOC A home equity line of credit works much like a regular line of credit, except it may come with a lower interest rate. The Office of the Superintendent of Financial Institutions (OSFI) expects federally regulated lenders to limit new HELOCs to 65 per cent of your home's appraised value.

Taking out a second mortgage The term “second” here means that a second loan is registered against your home in addition to the first mortgage. You must pay back both loans simultaneously. You can borrow up to 80 per cent of the appraised value of your home, minus the amount left to pay on your first mortgage.